Franklin Covey Reports Fiscal 2017 Third Quarter Financial Results

All Access Pass Progress Accelerates, with Contracts Invoiced plus
Add-On Services Increasing to $13.1 Million for the Quarter Compared
with $6.0 Million in the Third Quarter of Fiscal 2016

Company Expects Strong Fourth Quarter of Fiscal 2017

Company Completes Acquisition of Robert Gregory Partners, LLC

Revenue Ramps for New China Offices and Education Division

June 29, 2017 04:26 PM Eastern Daylight Time

SALT LAKE CITY--(BUSINESS WIRE)--Franklin Covey Co. (NYSE: FC), a global performance improvement company
that creates and distributes world-class content, training, processes,
and tools that organizations and individuals use to transform their
results, today announced financial results for its fiscal 2017 third
quarter, which ended on May 31, 2017.

Highlights

For Corporate Business:

Year-to-date through the third quarter, All Access Pass and
Pass-related amounts invoiced reached $31.4 million, a $21.9
million increase, compared with $9.5 million for the same period
in the prior year.

Year-to-date fiscal 2017 All Access Pass and Pass-related amounts
accounted for 53% of the total revenue invoiced for those offices
selling All Access Pass, compared with 14% last year.

Year-to-date All Access Pass net revenue renewal rate of more than
90%.

Third quarter fiscal 2017 growth in Education segment was 14% over
the prior year.

Expect more than 90% renewal of Leader In Me membership in fiscal
2017.

Expect to add approximately 800 Leader In Me schools by the end of
the fourth quarter, with more than 500 schools added in the United
States.

Introduction

During January 2016, the Company fully launched the All Access Pass
(AAP) offering through its sales associates that serve the United
States, Canada, the United Kingdom, and Australia. The All Access Pass
allows the Company’s clients to: purchase unlimited access to
FranklinCovey’s collection of best-in-class content to address their
most important performance needs; assemble, integrate, and deliver that
content through any of a broad combination of delivery modalities; have
the help of a FranklinCovey implementation specialist to design
customized impact journeys; and do so at a very attractive price per
population trained. Since its introduction in the first quarter of
fiscal 2016, AAP amounts invoiced have grown steadily on a
year-over-year basis, from $5.8 million in the third quarter of fiscal
2016 to $9.2 million in the third quarter of fiscal 2017, and from $9.3
million in the first three quarters of fiscal 2016 to $22.0 million in
the first three quarters of fiscal 2017, a 138 percent increase. The
Company believes that the transition to the All Access Pass will provide
significant future benefits as the average client sales size increases,
the retention rate of current clients improves, the ability to reach
additional customers expands, and clients realize greater value to their
organizations through access to expanded content and purchase additional
services and training materials. The Company also continues to invest in
the AAP offering, and is currently translating the core content into 16
languages, which is expected to be completed and launched in fiscal
2018. The Company believes that a broad range of clients, from large
multi-national organizations to smaller organizations served by its
international direct offices or licensee partners, will be able to
leverage the benefits of the AAP offering in their organizations.

The change to the AAP business model has required a transition both
operationally, as the sales force adapts its sales strategy, and from an
accounting and reporting point of view. Operationally, the AAP sales
cycle is typically longer than previous transactional type sales for
revenues such as facilitator and onsite contracts. The Company believes
this change reflects the strategic nature of the AAP sale and the need
for additional approvals at its clients. During the first quarter of
fiscal 2017, the Company decided to allow new AAP intellectual property
agreements to receive updated content during the contracted period.
Accordingly, the Company now defers substantially all AAP revenue at the
inception of the agreement and recognizes it over the life of the
corresponding contract. The Company expects that the transition to the
AAP business model will continue to have a significant impact on its
fiscal 2017 financial results as a higher percentage of the amount of
AAP contracts invoiced during the year will be deferred. However, the
recognition of those deferred sales is expected to significantly benefit
fiscal 2018 and future periods.

During the third quarter of fiscal 2017, the Company entered into the
following agreements which will expand the content and add-on services
available to All Access Pass clients.

On May 15, 2017, the Company acquired the assets of Robert Gregory
Partners, LLC (RGP), a Dublin, Ohio based corporate coaching firm, for
$3.5 million in cash plus potential contingent consideration totaling
$4.5 million. Robert Gregory Partners is a corporate coaching firm
with expertise in executive coaching, transition acceleration
coaching, leadership development coaching, implementation coaching,
and consulting. The Company plans to link the RGP coaching services to
the implementation of the All Access Pass, and believes that it will
become a key add-on service for All Access Passholders.

During the third quarter, the Company acquired certain license rights
for intellectual property for $0.8 million. The intellectual property
is in part based on works authored and developed by Dr. Clayton
Christensen, a well-known author and lecturer, who is also a member of
the Company’s Board of Directors. The initial license period is five
years and the agreement may be renewed for successive five-year
periods. The Company anticipates further purchases of intellectual
property rights in the future as it seeks to expand the offerings
available through its AAP portal.

The Company has traditionally recognized the majority of its earnings
during the third and fourth quarters of each fiscal year, and believes
that continued investments in its operations, especially during the
first two quarters of each fiscal year, are important to establishing
the foundation for growth in the second half of each fiscal year and in
future periods. During the first three quarters of fiscal 2017, the
Company opened three new direct sales offices in China, hired new client
partners and additional Education practice coaches, acquired license
rights for new intellectual property offerings through the AAP, and
continued to develop and expand the capabilities of its AAP offering.
The Company’s newly opened offices in China met expectations during the
third quarter, recognizing $2.6 million of sales. The transition of the
China operations from a licensee partner to a direct office has gone
well, and the Company expects continued favorable performance from these
offices in the future. The Company continues to expand its sales force
and hired new client partners and Education practice coaches near the
end of the fourth quarter of fiscal 2016 and in the first three quarters
of fiscal 2017. As these new sales personnel ramp, the Company
anticipates that they will contribute to expected sales during the
remainder of fiscal 2017. The Company plans to hire additional client
partners in the coming months.

Financial Overview

The following is a summary of key financial results for the quarter
ended May 31, 2017:

Revenue: Consolidated revenue for the
third quarter of fiscal 2017 was $43.8 million compared with $44.7
million in the third quarter of fiscal 2016. In addition, the Company
had a $5.4 million increase in subscription deferred revenues during
the third quarter, compared to a $2.1 million net change in
subscription deferred revenues during the third quarter of fiscal
2016. The Company’s newly opened sales offices in China reported $2.6
million in sales, which was in line with expectations, and the
Education practice grew by $1.1 million, or 14%, compared with the
third quarter of the prior year. These increases were offset by 1)
increased AAP revenues, which are initially deferred and recognized
over the lives of the underlying contracts; 2) a $1.7 million decrease
in domestic sales office revenues resulting from the transition to the
AAP business model and less onsite delivery revenues; 3) a $1.5
million decrease in Strategic Market segment revenues resulting from
fewer new contracts in its various divisions; and 4) a $0.5 million
decrease in international licensee royalty revenues as the Company’s
China licensee was converted to a direct office ($0.6 million of
royalty revenues in the third quarter of fiscal 2016).

All Access Pass Contracts: For the
quarter ended May 31, 2017, the Company invoiced $9.2 million of All
Access Pass contracts and $3.9 million of related services and
materials, compared with $5.8 million of AAP contracts and $0.2
million of related services and materials, in the third quarter of
fiscal 2016.

Gross profit: Third quarter 2017 gross
profit was $27.3 million compared with $29.6 million in the third
quarter of fiscal 2016. The decrease was primarily due to the impact
of increased AAP sales with the corresponding deferral of revenue, as
well as other factors described above, and the Company’s decision to
exit the publishing business in Japan and write off the majority of
its book inventory for $1.8 million. The Company’s gross margin for
the quarter ended May 31, 2017 was 62.5% compared with 66.1% in the
third quarter of fiscal 2016. Excluding the costs to exit the
publishing business in Japan, the Company’s gross margin improved to
66.6% of sales for the quarter ended May 31, 2017, even excluding the
net increase in the deferral of more than $3.3 million of high-margin
subscription deferred revenues.

Operating Expenses: The Company’s
operating expenses in the third quarter of fiscal 2017 increased by
$3.0 million compared with the third quarter of fiscal 2016, which was
primarily due to a $1.6 million increase in selling, general, and
administrative (SG&A) expenses and a $1.3 million restructuring charge
(described below). Increased SG&A expenses were primarily due to
opening new sales offices in China, hiring additional sales and
sales-related personnel, and increased non-cash share-based
compensation expense.

Restructuring Charges: During the third
quarter of fiscal 2017, the Company determined to exit the publishing
business in Japan and restructured its U.S./Canada direct office
operations in order to transition to an AAP centric business model.
The Company expensed $3.1 million related to these changes in its
business during the third quarter of fiscal 2017. Due to a change in
strategy designed to focus resources and efforts on sales of the All
Access Pass in Japan, and declining sales and profitability of the
publishing business, the Company decided to exit the publishing
business in Japan and wrote off the majority of its book inventory
located in Japan for $1.8 million, which was reported as a component
of cost of sales. The Company also restructured the operations of its
U.S./Canada direct offices to create new smaller regional teams which
are focused on selling the All Access Pass. Accordingly, the Company
determined that the three remaining sales offices were unnecessary
since most client partners work from home-based offices, the
operations of the Sales Performance and Winning Customer Loyalty
Practices were restructured, and certain functions were eliminated to
reduce costs in future periods. These charges totaled $1.3 million for
the quarter.

Operating Loss: The Company’s loss from
operations for the third quarter of fiscal 2017 reflected the factors
cited above and was $(6.5) million compared with $(1.3) million in the
third quarter of the prior year.

Adjusted EBITDA: Adjusted EBITDA for the
third quarter was a slight loss of approximately $18,000, compared
with $1.8 million of income in the third quarter of fiscal 2016.

Net Loss: Third quarter fiscal 2017 net
loss was $(4.5) million compared with $(1.1) million in the third
quarter of fiscal 2016, reflecting the above-noted factors.

Net Loss Per Share: Loss per share for
the quarter ended May 31, 2017 was $(.33) compared with $(.07) net
loss per share in the third quarter of the prior year.

Cash and Liquidity Remain Strong: The
Company’s balance sheet and liquidity position remained healthy
through the third quarter of fiscal 2017. The Company had $8.0 million
of cash at May 31, 2017, with $0.6 million of borrowings on its
revolving credit facility, compared with $10.5 million and no
borrowings on its line of credit facility at August 31, 2016.

Adjusted EBITDA and Growth in Deferred Revenue
Outlook: The Company anticipates a strong financial result in
the fourth quarter, and therefore expects Adjusted EBITDA for fiscal
2017 to be equal to, or slightly below, the previously released
guidance range of $10 million to $14 million. The Company’s original
guidance for the fourth quarter was $14 million of Adjusted EBITDA,
and that deferred revenue, less 15% for deferred costs, would increase
by more than $13.5 million. The Company still expects the change in
deferred revenue, less deferred costs, to increase by $13.5 million
and expects Adjusted EBITDA to be close to the guidance of $14
million, contingent upon the mix of sales in the fourth quarter. The
Company’s year-to-date Adjusted EBITDA is within $0.3 million of
guidance. The year-to-date change in deferred revenue, less deferred
costs, while significant, is $3.7 million less than previously
released guidance. While the Company anticipates a strong fourth
quarter result, it is possible, but unlikely, that this deficit can be
completely overcome for the year.

Bob Whitman, Chairman and Chief Executive Officer, commented, “During
the third quarter, we were encouraged by the strong year-over-year
growth in All Access Pass contracts invoiced, and by the high renewal
rate of All Access Pass contracts. We believe that the transition to the
All Access Pass business model will provide growth in future periods
through higher initial sale sizes, consistently strong renewals, and
from sales of add-on services and training materials. The All Access
Pass approach is strengthening every aspect of our business as we change
the way we engage with clients, both pre- and post-sale, expand our
reach within the customer, and create additional value for them. Because
of the long-term advantages of All Access Pass to our clients and to us,
we are pleased to have sales shift from our traditional channels to the
All Access Pass. The transition to the All Access Pass is building
strong momentum in our operations, and we believe that we are now at
positive inflection points where: our growing deferred revenue balances
will flow-through to increases in sales and profits; sales of services
and materials added on to All Access Passes alone will substantially
offset declines in our traditional onsite and facilitator channels; and
where the percentage profit flow-through on increases in revenue will
improve. We believe we are positioned for accelerated growth in the
fourth quarter and future years.”

Fiscal 2017 Year-To-Date Financial Results

Consolidated revenue for the first three quarters of fiscal 2017 was
$125.7 million compared with $135.2 million in the first three quarters
of fiscal 2016. Sales from the Company’s new offices in China totaled
$7.7 million for the first three quarters of fiscal 2017 and Education
practice sales increased $2.7 million, or 12%, compared with the prior
year. Increased sales in China and through the Education practice were
offset by 1) increased AAP deferred revenues, which are initially
deferred and recognized over the lives of the underlying contracts; 2)
an $8.4 million decrease in domestic sales office revenues primarily
resulting from the transition to the AAP-driven business model and
decreased onsite presentations; 3) a $3.8 million decrease in Sales
Performance practice revenues resulting primarily from ongoing
contracting issues; and 4) a $2.5 million decrease in international
licensee royalty revenues as the Company’s China licensee was converted
to a direct office ($1.8 million of royalties in the same period of the
prior year) and certain other licensee partners’ sales declined modestly
compared with the prior year. Consolidated gross profit was $80.7
million compared with $89.5 million in the first three quarters of
fiscal 2016. Gross margin for the first three quarters of fiscal 2017
was 64.2% compared with 66.2% in the first three quarters of the prior
year. Excluding the costs to exit the Japan publishing business in the
third quarter, gross margin was 65.6% for the three quarters ended May
31, 2017, which also excludes the increased deferral of high-margin
subscription revenues during the fiscal year.

The Company’s operating expenses increased $7.8 million compared with
the first three quarters of fiscal 2016. The increase in operating
expenses was primarily due to increased SG&A expenses from opening three
new offices in China during the fiscal year, which totaled $4.4 million;
a $3.5 million increase in spending related to new sales and
sales-related personnel, and increased travel and advertising to promote
the new offices in China and the AAP; a $1.3 million restructuring
charge, as previously discussed; $1.5 million of contract termination
costs, which were expensed in the second quarter; and a $1.1 million
increase in non-cash stock-based compensation expense. These increases
were partially offset by a decrease from the change in estimated earn
out payments from a prior acquisition, decreased bad debt expense, and
decreased amortization expense. As a result of these factors, the
Company’s loss from operations through May 31, 2017 was $(16.4) million
compared with income from operations of $0.2 million in the first three
quarters of fiscal 2016. Adjusted EBITDA for the three quarters ended
May 31, 2017 was a loss of $(3.2) million compared with income of $10.7
million in the first three quarters of fiscal 2016. Net loss for the
first three quarters of fiscal 2017 was $(11.8) million, or $(.86) per
share, compared with a net loss of $(0.7) million, or $(.05) per share,
in fiscal 2016.

Earnings Conference Call

On Thursday, June 29, 2017, at 5:00 p.m. Eastern time (3:00 p.m.
Mountain time) Franklin Covey will host a conference call to review its
financial results for the fiscal quarter ended May 31, 2017. Interested
persons may participate by dialing 888-771-4371 (International
participants may dial 847-585-4405), access code: 45130683.
Alternatively, a webcast will be accessible at the following Web site: http://edge.media-server.com/m/p/di4pdmku.
A replay will be available from June 29 (7:30 pm ET) through July 6,
2017 by dialing 888-843-7419 (International participants may dial
630-652-3042), access code: 45130683#. The webcast will also remain
accessible through July 6, 2017 on the Investor Relations area of the
Company’s Web site at: http://investor.franklincovey.com/phoenix.zhtml?c=102601&p=irol-IRHome.

Forward-Looking Statements

This press release contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995,
including those statements related to the Company’s future results and
profitability; future sales and renewals of AAP contracts and
accompanying accelerated growth; the expected sum of Adjusted EBITDA and
growth in deferred revenues in fiscal 2017; anticipated future sales,
including in the Company’s new China offices; anticipated impact from
the acquisition of Robert Gregory Partners, LLC; the release of
translated AAP content; expected benefits of AAP to the Company; and
goals relating to the growth of the Company. Forward-looking statements
are based upon management’s current expectations and are subject to
various risks and uncertainties including, but not limited to: general
economic conditions; renewal of AAP contracts; the performance of our
offices in China; the impact of new sales personnel; the impact of
deferred AAP revenues on future financial results; the expected number
of booked days to be delivered; market acceptance of new products or
services and marketing strategies; the ability to achieve sustainable
growth in future periods; and other factors identified and discussed in
the Company’s most recent Annual Report on Form 10-K and other periodic
reports filed with the Securities and Exchange Commission. Many of these
conditions are beyond the Company’s control or influence, any one of
which may cause future results to differ materially from the Company’s
current expectations, and there can be no assurance that the Company’s
actual future performance will meet management’s expectations. These
forward-looking statements are based on management’s current
expectations and the Company undertakes no obligation to update or
revise these forward-looking statements to reflect events or
circumstances subsequent to this press release.

Non-GAAP Financial Information

Refer to the attached table for the reconciliation of a non-GAAP
financial measure, “Adjusted EBITDA,” to consolidated net loss, the most
comparable GAAP financial measure. The Company defines Adjusted EBITDA
as net income or loss from operations excluding the impact of interest
expense, income tax expense, amortization, depreciation, stock-based
compensation expense, restructuring charges, and certain other items
such as adjustments to the fair value of expected earn out liabilities
resulting from the acquisition of businesses. The Company references
this non-GAAP financial measure in its decision making because it
provides supplemental information that facilitates consistent internal
comparisons to the historical operating performance of prior periods and
the Company believes it provides investors with greater transparency to
evaluate operational activities and financial results. We are unable to
provide a reconciliation of the above forward-looking estimate of
non-GAAP Adjusted EBITDA to GAAP measures because certain information
needed to make a reasonable forward-looking estimate is difficult to
estimate and dependent on future events which may be uncertain or out of
our control, including the amount of AAP contracts invoiced, the number
of AAP contracts that are renewed, necessary costs to deliver our
offerings such as unanticipated curriculum development costs, and other
potential variables. Accordingly, a reconciliation is not available
without unreasonable effort.

About Franklin Covey Co.

Franklin Covey Co. (NYSE:FC) (www.franklincovey.com),
is a global, public company specializing in organizational performance
improvement. We help organizations and individuals achieve results that
require a change in human behavior. Our expertise is in seven areas:
leadership, execution, productivity, trust, sales performance, customer
loyalty and education. Over its history, Franklin Covey clients have
included 90 percent of the Fortune 100, more than 75 percent of the
Fortune 500, thousands of small and mid-sized businesses, as well as
numerous government entities and educational institutions. Franklin
Covey has more than 100 direct and partner offices providing
professional services in over 150 countries and territories.

FRANKLIN COVEY CO.

Condensed Consolidated Statements of
Operations

(in thousands, except per-share amounts, and unaudited)

Quarter Ended

Three Quarters Ended

May 31,

May 28,

May 31,

May 28,

2017

2016

2017

2016

Net sales

$

43,751

$

44,738

$

125,734

$

135,224

Cost of sales

16,410

15,176

45,054

45,736

Gross profit

27,341

29,562

80,680

89,488

Selling, general, and administrative

30,713

29,095

89,177

83,521

Restructuring costs

1,335

-

1,335

376

Contract termination costs

-

-

1,500

-

Depreciation

949

1,003

2,743

2,809

Amortization

835

722

2,278

2,541

Income (loss) from operations

(6,491

)

(1,258

)

(16,353

)

241

Interest expense, net

(532

)

(483

)

(1,551

)

(1,416

)

Loss before income taxes

(7,023

)

(1,741

)

(17,904

)

(1,175

)

Income tax benefit

2,482

689

6,073

465

Net loss

$

(4,541

)

$

(1,052

)

$

(11,831

)

$

(710

)

Net loss per common share:

Basic and diluted

$

(0.33

)

$

(0.07

)

$

(0.86

)

$

(0.05

)

Weighted average common shares:

Basic and diluted

13,834

14,259

13,817

15,259

Other data:

Adjusted EBITDA(1)

$

(18

)

$

1,794

$

(3,204

)

$

10,675

(1)

The term Adjusted EBITDA (earnings before interest, income taxes,
depreciation, amortization, share-based compensation, restructuring
charges, and certain other items) is a non-GAAP financial measure
that the Company believes is useful to investors in evaluating its
results. For a reconciliation of this non-GAAP measure to the most
comparable GAAP equivalent, refer to the Reconciliation of Net Loss
to Adjusted EBITDA as shown below.

FRANKLIN COVEY CO.

Reconciliation of Net Loss to Adjusted
EBITDA

(in thousands and unaudited)

Quarter Ended

Three Quarters Ended

May 31,

May 28,

May 31,

May 28,

2017

2016

2017

2016

Reconciliation of net loss to Adjusted EBITDA:

Net loss

$

(4,541

)

$

(1,052

)

$

(11,831

)

$

(710

)

Adjustments:

Interest expense, net

532

483

1,551

1,416

Income tax benefit

(2,482

)

(689

)

(6,073

)

(465

)

Amortization

835

722

2,278

2,541

Depreciation

949

1,003

2,743

2,809

Stock-based compensation

1,210

1,048

3,987

2,922

Costs to exit Japan publishing business

1,792

-

1,792

-

Restructuring costs

1,335

-

1,335

376

Contract termination costs

-

-

1,500

-

Increase (reduction) to contingent earnout liability

-

88

(1,936

)

1,456

China start-up costs

-

60

505

106

ERP system implementation costs

327

131

920

224

Other expense

25

-

25

-

Adjusted EBITDA

$

(18

)

$

1,794

$

(3,204

)

$

10,675

Adjusted EBITDA margin

0.0

%

4.0

%

-2.5

%

7.9

%

FRANKLIN COVEY CO.

Additional Sales and Financial Information

(in thousands and unaudited)

Quarter Ended

Three Quarters Ended

May 31,

May 28,

May 31,

May 28,

2017

2016

2017

2016

Sales Detail by Segment:

Direct offices

$

24,019

$

23,894

$

68,678

$

72,107

Strategic markets

5,419

6,924

16,181

21,670

Education practice

8,596

7,517

25,187

22,520

International licensees

3,822

4,332

10,191

12,702

Corporate and other

1,895

2,071

5,497

6,225

Total

$

43,751

$

44,738

$

125,734

$

135,224

Sales Detail by Category:

Training and consulting services

$

41,822

$

42,275

$

119,982

$

127,746

Products

1,035

1,340

3,083

4,125

Leasing

894

1,123

2,669

3,353

43,751

44,738

125,734

135,224

Cost of Goods Sold by Category:

Training and consulting services

13,519

13,928

40,181

41,782

Products

2,370

621

3,332

2,081

Leasing

521

627

1,541

1,873

16,410

15,176

45,054

45,736

Gross Profit

$

27,341

$

29,562

$

80,680

$

89,488

FRANKLIN COVEY CO.

Condensed Consolidated Balance Sheets

(in thousands and unaudited)

May 31,

August 31,

2017

2016

Assets

Current assets:

Cash

$

7,956

$

10,456

Accounts receivable, less allowance for doubtful accounts of
$2,376 and $1,579